Iran war has created a new energy superpower — China
Missiles are flying again in the Gulf and the oil price is rising once more, with troubling consequences for many countries. However, the costs and benefits of the war are accruing in surprising ways. It’s not just that America is proving weaker and Iran stronger than the world had supposed, it’s that an unexpected winner has emerged from the conflict: China.
China seemed likely to be damaged by the war, for it relies on imports for the bulk of its oil and had cultivated Iran as an ally and supplier. Yet, because it had stocked up on oil before the US attack, it has proved to be less vulnerable to rising prices and the increasing difficulty of securing supplies than was anticipated.
Indeed, while Opec, the cartel of oil producers, has collapsed, China, which consumes 16 per cent of the world’s oil, has acquired a role in setting the price; putting a cap on it by withdrawing from the market when the price is high, and a floor on it by buying when the price is low.
At the same time, the war has brought China strategic dividends. America has pulled missile defence systems out of South Korea to redeploy them in the Middle East, leaving the country suddenly vulnerable to North Korea. The Pentagon has also moved an aircraft carrier, the USS Abraham Lincoln, from the South China Sea to the Gulf. The military balance in Asia has thus tipped in China’s favour.
The perception of which superpower might be the more reliable ally has also shifted. The one on the other side of the world with the hair-trigger president who imposes tariffs unpredictably on both friends and enemies is looking like a worse bet than the powerful neighbour who takes the long view and isn’t going anywhere.
This fits nicely with President Xi’s vision for the region. “It is for the people of Asia,” he told a conference 12 years ago, “to run the affairs of Asia, solve the problems of Asia and uphold the security of Asia.”
America’s attack on Iran has given China new economic clout too. By pushing up the price of oil and increasing uncertainty over supplies, the conflict has hastened the move away from fossil fuels towards clean energy. Since America is the world’s largest oil producer and China is the world’s largest producer of clean-energy hardware, this shift is to America’s detriment and China’s advantage.
China’s dominance of the clean-energy business is not an accident. In 2000 Wan Gang, a Chinese engineer who had been working for Audi in Germany, persuaded Beijing that in order to beat the West in the car business, China should leapfrog the internal combustion engine and go for electric vehicles. The government bought the idea, Wan became trade and science minister and companies such as BYD and XPeng were heavily subsidised. China now produces 70 per cent of the world’s EVs.
Since EVs are essentially metal shells around a battery, Chinese supremacy in the industry means it also dominates the global battery business. That’s crucial, and not just to cars. Increasingly, batteries are seen as the future of energy. In countries such as Australia and Pakistan, households are going off grid, using solar panels to produce their own energy and storing it in their own batteries.
China made a similar strategic bet on solar photovoltaic equipment. In 2000 it published a 15-year plan to create a solar energy business. It imported technology from Germany — at the time the dominant producer — subsidised companies and, when the German government withdrew subsidies, flooded the market. The German industry went bust and China now produces 80 per cent of the world’s solar panels.
China has also cornered the market in rare earths, 17 minerals such as neodymium and dysprosium (essential for EV magnets) used in high-tech manufacturing. Again, that was not happenstance. In 1992 Deng Xiaoping said: “The Middle East has oil. China has rare earths.” China is not the only place they are found but it has invested in processing them and now has about 90 per cent of global capacity.
Fearful of the impact on US industry, America is trying to use trade restrictions to weaken China. There is a 100 per cent tariff on Chinese EVs and a 50 per cent tariff on Chinese solar equipment. The EU has also imposed a tariff of up to 35 per cent on Chinese EVs. But the rest of the world, which mostly doesn’t have a clean-energy industry to protect, is more than making up for it. In March, the month after the US launched its war on Iran, Chinese solar-panel exports doubled. EV exports in May were half as high again as a year earlier.
China, meanwhile, also has trade weapons in its arsenal. It has retaliated against US and European tariffs with curbs on the export of rare earths, requiring exporters to apply for every shipment, detailing the recipients and the uses to which materials will be put. The bureaucracy is nightmarish and prices are rising: the cost of neodymium and dysprosium has doubled.
All this looks like a confirmation of one of Xi’s favourite slogans: “The East is rising, the West is declining.” In a seminal speech, he told the 19th party congress in 2017 that China “has stood up, grown rich and is becoming strong; it has come to embrace the brilliant prospects of rejuvenation”. Yet, while China’s clean-energy exports are a manifestation of its global clout, they are also a symptom of its economic, social and demographic problems.
China’s exports are doing so well partly because they’re so competitively priced. That’s not just because Chinese factories are very productive but also for less healthy reasons. One is that the country has far too much industrial capacity. The hefty subsidies the government funnelled towards these industries has led to overinvestment. The solar industry has the capacity to produce 1,200GW of panels yet only about 650GW were installed around the world last year.
According to a recent research paper, only 25 per cent of the clean-energy sector’s capacity is being used, which suggests a staggering amount of money has been wasted creating production lines to make stuff nobody wants. Products are therefore being exported at prices that may not even cover costs.
A second reason for the export surge is a lack of domestic demand. China’s economy is flagging. The official figure for growth in the second quarter of this year, 4.3 per cent, was one of the lowest for decades — and nobody believes it is that high. Independent estimates range from flat to 3 per cent, with exports accounting for much of whatever growth there is. China’s domestic economy is probably fairly flat. Retail sales have increased by 1 per cent year on year. Investment is falling.
The Chinese economy has not recovered from a huge property bust five years ago. At the centre of it was Evergrande, a company that went down with $300 billion in liabilities. It was China’s biggest bankruptcy ever. Property prices have been falling for four years, and in some areas are down by half. There’s a huge overhang of debt in state governments and private companies, which the central government props up in a policy known as “extend and pretend” — extend more credit and pretend it’s not happening.
China’s vast network of debt
Yet that vast network of debts is a drag on the economy and society. Housing makes up 70 per cent of people’s wealth in China, compared with 40 per cent in the UK; and many people’s life savings are tied up in virtually worthless flats in ghost cities where nobody wants to live. There are no official figures on the scale of the problem but there are reckoned to be about 90 million such flats — about a quarter of all the housing built this century.
People who have lost their life savings are more likely to hoard cash than to splash out, so consumers aren’t spending. For LVMH, Kering and Burberry, which had come to rely on Chinese consumers’ enthusiasm for luxury brands, the result has been catastrophic. Revenues have slumped and the companies’ share prices have dropped 45 per cent, 70 per cent and 55 per cent respectively since their peaks two or three years ago. Hence Chinese manufacturers’ desperation to export their goods at any price.
While consumers aren’t giving companies grounds for optimism, technology is. China has taken a different approach from the West to artificial intelligence. In America, a few companies are amassing vast amounts of capital as they try to beat each other in the race to produce the most brilliant AI, but so far the technology has had little impact on the workplace. China, as it has done for half a century, is following in the slip-stream of American innovation, sometimes legally, sometimes not.
Earlier this year, a Chinese engineer working for Google was found guilty on 14 counts of stealing AI-related trade secrets; Anthropic claims that Alibaba, a Chinese company, has been on a campaign to “illicitly extract Claude’s capabilities”. Beijing’s approach is to focus on application rather than cutting-edge innovation, instructing companies to embed AI and robotics in their manufacturing processes. China’s manufacturing sector is thus the most automated in the world. Nearly half the world’s robots are in its factories, and it is installing them at nine times the rate of the US.
But, while this development is making factories more productive, Chinese people aren’t feeling any benefit. This manufacturing boom is not creating the (relatively) well-paid jobs that previous ones did. Young Chinese graduates are increasingly employed in the gig economy: there are 320 million people in “flexible” work this year, up from 280 million last year. That’s about 40 per cent of the labour force. Only 70 million gig workers are reckoned to be enrolled in pension schemes, which suggests a big problem as China ages.
The gloomy outlook for the young is having a profound effect on Chinese society. For half a century people have accepted the idea that they should work furiously hard in return for a better life than their parents. The code for this is “996”: 9am to 9pm, six days a week. However, that generational uplift no longer seems to be on offer and a new work ethos has taken hold: tang ping, or lying flat. Increasingly, young people are giving up — not bothering to get a job or, if they do, not striving for promotion and doing as little as they can get away with.
An alternative form of escapism is runxue, the study of running away. The Chinese internet is full of forums of people discussing how to leave the country, and many are doing so. There was a significant flow of Chinese people into the US through Ecuador and central America, but President Trump has in effect shut America’s southern border. Europe is also increasingly difficult to access. Japan, though a historical enemy, is now a favoured destination: there are nearly one million Chinese people living there and the number is rising fast.
This disaffection has given rise to the self-described Four No Youths (the Chinese do love a numerical slogan): no dating, no marrying, no buying a house and no children. And this is contributing to a trend that is undermining Xi’s vision of a rejuvenated China.
China has the world’s biggest demographic problem. Its vast population is growing old so fast that it has, in UN nomenclature, already moved from being an ageing society to an aged one. It has more pensioners over 65 than it has children under 15. Its fertility rate, which used to be over seven children per woman, is now the lowest of any big country.
In the US and the UK it is 1.6, the average in the EU is 1.3 and in Japan it is 1.1. In China it is 1. The one-child policy, which was introduced in the 1970s, may bear some responsibility, but it was dropped ten years ago and the population’s steep downward trajectory is now clearly a matter of individual choice.
Unstoppable demographic change
As everybody knows, China thinks in the long term. Sadly Zhou Enlai, the former Chinese premier, was misunderstood when he responded to a question from President Nixon on the consequences of the French Revolution: “Too early to tell.” (Zhou thought Nixon was asking about the 1968 student uprising in Paris and, given this was in 1972, that was an unremarkable response.) But Chinese governments’ time horizons, unconstrained by the need to seek the approval of voters every four or five years, are unquestionably longer than western ones.
China’s demography clearly has a huge impact on its long-term global ambitions. Its population started to shrink in 2022, has dropped below that of India and is projected to fall by about 100 million by 2050. At this rate it will halve by the end of the century.
America’s, which is still growing, will be about two thirds of the size of China’s by then, and India’s will be more than twice as big. China’s demography is weakening it economically too. Notwithstanding its astonishing manufacturing prowess, its share in the global economy, measured in dollars, is already shrinking.
The government has tried to shift its demographic trajectory by offering mothers cash, childcare and flexible working, while taxing contraceptives and censoring anti-marriage and anti-children chat on the internet. Nothing has succeeded in budging it. Chinese women just don’t feel like having children.
China’s rise has been astonishing. Over the past half century it has lifted more people out of poverty and spread prosperity more widely than any country in the history of the world. The achievement is the result of effective government, which shows up in the kind of long-term planning that has enabled the country to dominate the future energy business, and the efforts of an extraordinarily hard-working population. In Xi’s view, “the banner of socialism with Chinese characteristics is now flying high for all to see”. That’s certainly how it looks from the outside world.
Not so much within China, though. Its people are having a little lie-down. Maybe they will pick themselves up again, maybe they won’t. But that’s what will determine the shape of the world to come. If Chinese workers aren’t willing to go on striving, if Chinese women won’t procreate, then no amount of clever planning by Chinese governments will shift the balance of power further in the country’s favour.
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